Abstract

We use a simple model of sequential duopoly to examine the effect of different industrial structures on firms' output decision and profit shares in the international market for raw and processed tropical timber products. The model provides insights that can be applied to the Indonesian logging and plywood industry: shedding light on the appropriate policy responses.
Whether optimal trade policy in each industry involves a tax or subsidy depends on the ownership structure and on the comparative profit margins from upstream and downstream exports. Log barriers may improve welfare even if the downstream sector is inefficient. When the industry is vertically separated, this is true regardless of the comparative profit margins. However, when the industry is vertically integrated (which is the case of Indonesia), this is only true when the downstream sector is more profitable at the margin.